Helping Entrepreneurs of Color Grow their Business

Helping Entrepreneurs of Color Grow their Business

Early Insights from the Ascend 2020 Initiative

DECEMBER 2018

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ACKNOWLEDGEMENTS This research was made possible by JPMorgan Chase & Co. through its Small Business Forward initiative, a $150 million, multi-year global effort to connect underserved small businesses to experts and critical resources that help them grow faster, create jobs and strengthen local economies. Small Business Forward supports women, minority and veteran-owned small businesses through a series of approaches to help build their long-term success, creating local, inclusive economic growth.

About the University of Washington Foster School of Business Consulting and Business Development Center

The Consulting and Business Development Center accelerates student careers and grows businesses and jobs in communities where they are needed the most. Through the center's programs, students build skills and gain experience in consulting and solving business challenges while business owners gain access to business education that creates jobs and changes lives. Combining academic rigor with business relevance our student consulting and business education programs produce bottom-line results for minority-, women-, LGBTQ- and other "diverse"-owned businesses and businesses in lower income communities. Founded in 1995, the Center has generated more than $200 million in new revenue and created and retained 200,000 jobs. For more information about the University of Washington Foster School of Business Consulting and Business Development Center, please visit foster.uw.edu/consult.

About the Initiative for a Competitive Inner City (ICIC)

ICIC is a national, nonprofit research and advisory organization founded in 1994. Its mission is to drive economic prosperity in America's inner cities through private sector investment. For more information about ICIC, please visit .

The views and opinions expressed in the report are those of ICIC and the University of Washington Foster School of Business' Consulting and Business Development Center and do not necessarily reflect the views and opinions of JPMorgan Chase or its affiliates.

Authors: d Kimberly Zeuli, Ph.D., Senior Fellow, ICIC d Austin Nijhuis, Senior Research Analyst, ICIC d Peter Eberhardt, Research Analyst, ICIC d Kathleen O'Shea, Senior Research Analyst, ICIC d Michael Verchot, Director, Consulting and Business Development Center,

University of Washington Foster School of Business

For inquiries about this report, please contact Kim Zeuli at kzeuli@.

Published December 2018. ?ICIC

Cover image by Wilfredo Tutol, University of Washington Foster School of Business Consulting and Business Development Center

2 ICIC | UW Foster School of Business | JPMorgan Chase & Co.

Supporting the Growth of Diverse Businesses Matters

Minority-owned businesses play an increasingly important role in the U.S. economy. The nearly one million (996,248) minority-owned businesses with paid employees contribute $1.2 trillion in revenue and eight million jobs to the economy.1 Minority-owned businesses are especially important to inner cities--economically distressed urban neighborhoods characterized by high poverty and high unemployment rates-- and minority wealth building. Building wealth for people of color in inner cities requires not only maximizing employment, but also supporting the development of more entrepreneurs in these neighborhoods and helping them grow their businesses. Entrepreneurship is a wealth building strategy and pathway out of poverty (Bradford, 2003; Gentry and Hubbard, 2004; Quadrini, 2000; Sutter, Bruton, and Chen, 2018). Supporting entrepreneurs of color in inner cities will build wealth and decrease unemployment and poverty in urban areas that need it most.

Yet, there is a disparity in U.S. firm performance based on race (Figure 1) and the share of minority-owned businesses is not keeping pace with the growth of the minority population (Figure 2). Minority-owned firms earn just 48 percent of the revenue of nonminority-owned firms.2 Even among the high-growth inner city businesses that ICIC tracks, minority-owned businesses have not kept pace with their non-minority counterparts. Minority-owned businesses earn 72 percent of the revenue of nonminority-owned firms and just 44 percent of profits (Figure 3).

Although 38 percent of the population in the U.S. is minority, only 19 percent of businesses are minority-owned.3 In inner cities, where 76 percent of the population is minority, less than one-quarter (23 percent) of all inner city businesses are minority-owned.4 Some entrepreneurs of color, especially African Americans, may not be getting the support they need to start and grow their businesses. While the number of African American-owned businesses grew at a higher rate than any other segment of businesses between 2002-2012, start-up rates among African Americans is not keeping pace with the growth rate of their demographic. As such, African Americans are still less likely to start a business than non-minorities and some other minority groups (Fairlie, Morelix, & Tareque, 2017).

Figure 1. Minority-Owned Firms are Underperforming

Minorityowned firms earn

48%

of the revenue of nonminorityowned firms

$1.2M

Average Annual Revenue

$2.5M

Average Annual Revenue

Minority-owned

Nonminority-owned

Source: 2015 U.S. Census Bureau Annual Survey of Entrepreneurs.

1 2015 U.S. Census Bureau Annual Survey of Entrepreneurs data for privately held firms with paid employees. The U.S. Census defines minorities as any race and ethnicity group other than non-Hispanic White. Minority includes the following groups: Hispanic or Latino, American Indian or Alaska Native, Asian, Black or African American, Native Hawaiian or Other Pacific Islander, and Some Other Race, including Two or More Races.

2 2015 U.S. Census Bureau Annual Survey of Entrepreneurs data for privately held firms with paid employees. 3 2015 U.S. Census Bureau Annual Survey of Entrepreneurs data for privately held firms with paid employees and 2015 U.S. Census Bureau American Community Survey 5-Year

Estimates data. 4 Inner city data is ICIC analysis of 2012 U.S. Census Bureau Survey of Business Owners data for privately held businesses with paid employees and 2015 U.S. Census Bureau ZIP

Business Patterns data. Both data sets are the most recently available. The total number of minority-owned businesses in the inner city is estimated by multiplying the share of minority-owned businesses in the city by the total number of businesses in the inner city. For the U.S., the total number of minority-owned businesses is estimated by multiplying the share of minority-owned businesses in the U.S. by the total number of businesses in the U.S. We assume that the share of minority-owned businesses for the inner city is the same as the share for the rest of the city, which may lead to underestimation. We estimate that 161,530 minority-owned businesses are located in inner cities.

3 Helping Entrepreneurs of Color Grow their Business

Figure 2. Disparities in Business Ownership by Race

U.S. OVERALL

INNER CITIES

38%

Minority Population

19%

Minority-owned Businesses

76%

Minority Population

23%

Minority-owned Businesses

Source: U.S. estimates use 2015 U.S. Census Bureau Annual Survey of Entrepreneurs and 2015 U.S. Census Bureau American Community Survey 5-Year Estimates. Inner city estimates use the 2012 U.S. Census Bureau Survey of Business Owners data for privately held businesses with paid employees, 2015 U.S. Census Bureau ZIP Business Patterns and the 2015 U.S. Census Bureau American Community Survey 5-Year Estimates.

Figure 3. Disparities in Business Performance by Race Among High-Growth Inner City Businesses

Average Revenue

Average Net Income

Minorityowned firms earn

72%

of the revenue of nonminorityowned firms

Minorityowned firms earn

44%

of the profits of nonminorityowned firms

$18M $25M

$0.87M $2M

Minority-owned

Nonminority-owned

Inner cities can be fertile ground for entrepreneurs of color. Since 1999, ICIC has tracked the performance of high-growth inner city businesses spanning a wide range of industries.

High-growth industries are typically part of "traded" clusters--groups of industries that export goods and services out of a region. Only 19 percent of minority-owned businesses in inner cities operate in traded clusters and just two percent are high-tech businesses.5 Further, while only a small share of the high-growth inner city businesses tracked by ICIC exclusively serve inner city customers or local markets, the share is higher for minority-owned businesses than nonminority-owned businesses (Figure 4). Minority-owned highgrowth inner city businesses are just slightly skewed towards serving national and international markets, whereas minority-owned businesses in general are more likely to serve international markets (Minority Business Development Agency, 2012).

However, most organizations that support inner city entrepreneurs focus on small businesses with limited growth potential (i.e., "Mom and Pop shops"). The orientation towards local markets has a negative effect on wealth building. Businesses in strong, traded clusters are associated with

higher employment and wage growth (Delgado, Porter, & Stern, 2012). In contrast, businesses that serve local, minority neighborhoods have lower profits and higher firm closure rates (Bates & Robb, 2008, 2014; Shinnar, Aguilera, & Lyons, 2011).

Figure 4. Market Comparison by Race for High-Growth Inner City Businesses

Minority-owned

Inner city

0%

Local market

17%

Regional market

28%

National market

33%

International market 22%

Nonminority-owned

Inner city

1%

Local market

2%

Regional market

22%

National market

44%

International market 31%

Notes: Local market includes inner city, rest of city and county. Regional market includes local market and regional market. National market includes regional and nationwide markets.

5 U.S. Census Bureau 2012 Survey of Business Owners for privately held firms with paid employees and 2015 U.S. Census Bureau ZIP Business Patterns. Traded and local clusters are defined by Delgado, Porter and Stern (2014). High-tech sector defined by Haltiwanger, Hathaway and Miranda (2014).

4 ICIC | UW Foster School of Business | JPMorgan Chase & Co.

UNIQUE DATA, UNIQUE INSIGHTS ON INNER CITY BUSINESSES

New data collected by ICIC in 2017 from 194 high-growth inner city businesses allows us to compare minority and nonminority-owned business performance.6 All of the businesses had been ranked as one of the fastest growing inner city businesses by ICIC's Inner City 100 program between 1999 and 2016. Both minority-owned (78 businesses) and nonminority-owned businesses (116) in the sample comprised mostly mature, smaller businesses with healthy revenue. The average age was 21 years for minority-owned businesses and 26 years for nonminority-owned businesses. Regardless of ownership, most of the businesses serve other businesses (B2B), with a smaller share serving businesses and consumers (B2B/B2C hybrid) and a very small share serving only consumers (B2C) (Figure 5). The most significant difference between the businesses was leadership: minority CEOs run almost all of the minority-owned firms (91 percent), compared to just three percent of the non-minority owned firms.

Figure 5. Organizational Comparison by Race for High-Growth Inner City Businesses

Minority-owned

B2C B2B B2B/B2C hybrid

3% 69% 28%

Nonminority-owned

B2C B2B B2B/B2C hybrid

4% 63% 33%

Entrepreneurs of color face a different degree of challenges than their white counterparts because of structural biases (Bradford, 2014). This report identifies the strategies needed to help entrepreneurs of color, including those in high-growth sectors and in inner cities, overcome these challenges. Most programs focused on supporting entrepreneurs of color target small business creation, which is important, but exclude an important segment of entrepreneurs who can maximize job creation in the urban areas that need them most. This report also includes a review of a promising new model to supporting entrepreneurs of color that was launched in 2017 in six markets, Ascend 2020.

The remainder of the report is divided into four sections: ? Entrepreneurs of Color Need Support Across the

"Three Ms,"p. 7; ? A New Initiative to Support Entrepreneurs of Color:

Ascend 2020, p. 11; ? Early Insights into the Impact of Ascend 2020, p. 18; and ? Policy Insights, p. 21.

6 To qualify as a high-growth inner city business, businesses need to be located in an inner city, show revenue growth over a five-year period, have a minimum of 10 full-time employees and at least $1 million in revenue. In 2017, ICIC surveyed all firms recognized by the Inner City 100 program from 1999 to 2016 (636 businesses) and received 228 total responses (a 36 percent response rate). Of these, 194 businesses self-reported their ownership status. Operations data was reported for the 2016 calendar year.

5 Helping Entrepreneurs of Color Grow their Business

INNER CITY DEFINITION

ICIC defines an inner city as a set of contiguous census tracts in a city that have higher poverty and unemployment rates than the surrounding MSA and, in aggregate, represent at least five percent of a city's population. Each inner city census tract must meet either of two criteria: (1) an absolute poverty rate of at least 20 percent, or (2) a relative poverty rate that is at least 150 percent or greater than that of the MSA, as long as the unemployment rate is at least 150 percent greater than that of the MSA or the median household income is 50 percent or less than that of the MSA. ICIC excludes student populations in its calculations. Applying ICIC's inner city definition to 2011 American Community Survey data for all U.S. cities with populations greater than 75,000, ICIC identifies 328 inner cities.

Map 1. Atlanta, GA and its Inner City

Inner City

Inner City

City

City Rest of Metro

Rest of Metro

Notes: Inner city boundary was defined using 2011 American Community Survey 5-Year Estimates and ICIC's inner city definition. Green shows census tracts within the 2011 inner city that qualify as inner city in 2015. Source: U.S. Census Bureau 2015 American Community Survey 5-Year Estimates.

6 ICIC | UW Foster School of Business | JPMorgan Chase & Co.

Entrepreneurs of Color Need Support Across the "Three Ms"

Entrepreneurs--independent of race or ethnicity--require three fundamentals in order to successfully start and grow their business: education (general and business management), access to money (sufficient financial capital), and access to markets to sell their products and services (Figure 6). Over the past several decades, researchers have established that the challenges of acquiring the so-called "three Ms" are more acute for entrepreneurs of color (Bradford, 2014; Fairlee & Robb, 2008).

Figure 6. The Ascend 2020 Three M Model

Management Education

ENTREPRENEURS OF COLOR

Access to Money

Access to Markets

Management Education

Minorities lag behind non-minorities in terms of business management education and experience. For example, African Americans and Hispanic Americans are underrepresented in the business school admissions pipeline compared to both the overall U.S. population and the population with a bachelor's degree (Graduate Management Admission Council, 2018). African Americans account for eight percent of GMAT examinees and Hispanic Americans represent seven percent, while White, non-Hispanics represent 66 percent.

African-American business owners are also less likely to have self-employed family members and, therefore, are less likely to have acquired business management experience compared to non-minority business owners (Fairlie & Robb, 2007, 2008). Lower business education and experience may partially explain the gap between African-American and nonminority-owned business performance (Fairlie & Robb, 2007, 2008). Indeed, among high-growth inner city businesses, CEOs of color need to have more education than their white peers to make just 44 percent of their profits (Figure 7). Educational differences (including a lack of experience and role models) may also be a contributing factor in the lower start-up rates among African Americans, especially in high-growth sectors. Research finds that high-growth ventures typically require founding teams with greater levels of education than non-high-growth firms (Aulet & Murray, 2013; Barringer, Jones, & Neubaum, 2005).

7 Helping Entrepreneurs of Color Grow their Business

Figure 7. CEO Education Comparison by Race Among High-Growth Inner City Businesses

Graduate Degrees

Business Education

81%

43% 25%

60%

Minority CEOs

Non-minority CEOs

EARLY INITIATIVES TO STRENGTHEN MANAGEMENT SKILLS FOR ESTABLISHED MINORITY BUSINESS OWNERS

In 1980, the Tuck School of Business at Dartmouth College launched the first one-week management education program for executives of minority-owned firms. In 2000, the National Minority Supplier Development Council (NMSDC) partnered with the Kellogg School of Management at Northwestern University to establish the Advanced Management Education Program to provide NMSDC-certified Minority Business Enterprises (MBEs) with the tools and skills to accelerate growth. MBEs must be recommended by a corporate member of NMSDC. Eight years later, the Foster School of Business at the University of Washington launched the second minority business executive program to officially partner with the NMSDC. All of these programs focus exclusively on building the management skills of minority entrepreneurs who have already achieved an initial level of success with their business.

Access to Money

Access to capital, especially growth capital, is a significant challenge for entrepreneurs of color. Minority-owned businesses tend to pay higher interest rates and receive smaller loans than nonminority-owned businesses. They are also more likely to be denied credit and less likely to apply for loans because they believe their applications will be denied (Bates & Robb, 2013; Fairlie & Robb, 2007, 2010). Venture capital funding is also skewed--from 1990 to 2016, minority entrepreneurs only represented approximately 20 percent of entrepreneurs funded by venture capital (Gompers & Wang, 2017). In terms of angel investments, minority-owned businesses represented only 11 percent of pitches to angel investors in 2017 (Sohl, 2018).

These challenges are exacerbated for entrepreneurs of color operating in inner cities, where business financing to fund the creation and expansion of inner city businesses is insufficient, in part because of biases in bank lending patterns against inner city neighborhoods (Bates, 2010; Bates & Robb, 2013). In addition, both entrepreneurs of color and businesses located in inner cities tend to be underserved by private equity investments (Rubin, 2010). Venture capital networks tend to be geographically concentrated and businesses located in inner cities may be geographically isolated from these networks (Barr, 2015).

As a result of these capital access challenges, minority-owned businesses typically operate with substantially less capital overall than their nonminority-owned counterparts, both during start-up and growth stages, which constrains growth (Fairlie & Robb, 2008, 2010; Lofstrom & Bates, 2013). Entrepreneurs of color are also more likely to enter industries with low capital requirements and high failure rates instead of high-growth sectors (Lofstrom & Bates, 2013).

ICIC's data on high-growth inner city businesses finds that while a similar share of minority- and nonminority-owned businesses tried to raise capital, only half of the minority-owned businesses that tried to raise equity were successful, compared to 84 percent of nonminority-owned businesses. In terms of securing loans, these high-performing minority-owned businesses were very successful and secured loans at nearly the same rate as their non-minority counterparts (91 percent and 95 percent, respectively), but received smaller loans than they needed. Just over half (58 percent) of

8 ICIC | UW Foster School of Business | JPMorgan Chase & Co.

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